You dont need strategic investors

11/28/2017By Sammy Abdullah, CFA

Strategic investors, defined as corporations that make venture investments, can be a valuable source of capital, but are they critical? No. We dug through the S1’s of 97 tech companies and found that only 16 of them had a strategic investor (an S1 is a doc filed with the SEC before going public). The full list of companies is below.

Notably, some industries have more prevalence of strategic investment than others. For instance, three out of the seven hardware companies we looked at had a strategic investor whereas industries like marketplaces, social media, and e-commerce barely had any. All the companies listed above are very successful as they’re all publicly traded today or were at one point, so we’ve concluded you do not need a strategic investor to be successful given that only 16 out of 97 had a strategic investor.

Some of the companies in our own portfolio have strategic investors such as Match.com, GE, Cisco, Salesforce, the CIA, and Survey Monkey. What we’ve found is that in most cases, strategics don’t add much value. Rather, they’ve invested because they think the company is interesting and want to be in a position to acquire it if the company shows great potential. In other cases (GE and Cisco for instance), they’ve invested because they’re heavy users of the product and want to make it better (in which case they’re very valuable).

If you are going to take on a strategic investor, make sure they don’t have any unique controls or rights outside of those granted to normal investors. For instance, some strategics will ask for a Right of First Refusal to buy your company, which can be very damaging when it’s time to sell your business – no one will want to bid for you if they know that after all their hard work, XYZ strategic can cancel the deal and buy your company themselves. Also make sure that startegics do not have control over the direction of your product – it’s great to take their advice when that advice fits into the road map, but an investment doesn’t give them the right to mandate what you build.

As always choose your investors wisely, but don’t fret if the strategics aren’t a part of your business.

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